Jag Venugopal's Blog

December 20, 2011

AT&T should have been allowed to buy T-Mobile

Filed under: Business — Jag @ 6:43 am

AT&T has thrown in the towel on its attempt to buy T-Mobile, the fourth largest wireless provider in the US. The US Government (DOJ and FCC) opposed this merger citing concerns that the merged entity will reduce competition. Their theory was that T-Mobile was an upstart that often undercut the majors on wireless pricing. Without T-Mobile, wireless pricing would go up.

If only it were that simple. If only AT&T were merging with T-Mobile only to remove a competitor from the marketplace.

The wireless business is extremely capital intensive. There are two kinds of capital investments that go into this business — firstly the towers, and all the physical paraphernalia. These are the least of AT&T’s problems. The second kind of huge investment that goes into the business is wireless spectrum. AT&T had too little of it and wanted to buy T-Mobile to get access to its spectrum.

In the smartphone world, data speeds, and data and call quality are everything. With everyone and his brother-in-law buying an iPhone or an Android device, tremendous demand is generated for data. The problem is that data is transmitted through the electromagnetic spectrum… think of it as invisible wires. Each invisible wire can only carry so much of data, and AT&T has run out of invisible wires in major markets such as NYC and San Francisco. This probably accounts for a lot of people’s dissatisfaction with AT&T even though it has offered the iPhone for the longest time and in general, its rates are lower than Verizon’s.

The T-Mobile merger was a Hail Mary pass on the part of AT&T to land the spectrum it desperately needed in order to stay competitive with the other behemoth in the wireless market — Verizon. Without this spectrum, the prospects of improved service from AT&T are significantly diminished. The prospects that AT&T can scale up its network to meet future demand are similarly dealt a blow.

T-Mobile is also similary hurt by the merger’s failure. They’ve been hemorrhaging customers over the past couple years, lacking the money and the spectrum to provide 4G wireless service that is competitive with Verizon. Their corporate parent, Deutsche Telekom, does not want to invest more money in the US. Without significant investment, T-Mobile will be relegated to an also-ran, offering cut rate plans without any of the new features that customers demand. Who would want to buy an expensive smartphone and be saddled with a 2-year contract on a poky network?

By disallowing the merger, the US Government has strengthened Verizon’s hand while leaving two of its competitors significantly weakened. The third one (Sprint) was weak anyway, thus leaving Verizon Wireless with a de facto monopoly in the 4th generation wireless market. As a result, prices for 4G wireless will not diminish, and will probably increase.

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